Vanguard Prime Money Market Fund

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Vanguard Prime Money Market Fund

Postby SpaceSashimi » Wed May 22, 2013 9:10 pm

Can someone explain the Vanguard Prime Money Market Fund in depth to me. Is it just a temporary account to hold your money until you know what to do with it? Does it make interest if left there awhile? Why does it have an expense ratio? Should I keep anything in it? Thank you.
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Re: Vanguard Prime Money Market Fund

Postby Laura » Wed May 22, 2013 9:28 pm

Hi,

The Vanguard Prime Money Market account is like all money market accounts except with lower expenses than many of their competitors. Money markets are often used as a temporary holding place for money but they have also been used to hold longer term cash needs like emergency funds. They do earn interest although how much varies. In that sense it works much like a savings account at a bank. However, since interest rates dropped so significantly during the last few years, most people holding money for the longer term have moved their money into banks for the FDIC insurance and, at time, higher rates of return. Money markets are not insured by the federal government so they are higher risk than bank accounts which have FDIC insurance (assuming the amount is under the limit). Money markets maintain a $1 per share cost so they are very stable so if you put $1000 in you can almost be sure you will get $1000 back plus whatever interest you earned. In the big crash a few years back at least one big money market fund "broke the buck" meaning it lost money and shares were no longer worth $1. This was huge news.

Vanguard tends to invest more conservatively than other funds because their expense ratio is so low and they do not need to take on extra risk to earn return to cover those expenses. However, the return of the Prime Money Market is very, very low right now and may not be worth it. That said, I still use it as a temporary holding place for money going into my investments. The money is there for a few days at most and it just helps with the flow between my paycheck and my investments.

I don't know exactly what you are looking at this account to do so I hope I answered your question.

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Re: Vanguard Prime Money Market Fund

Postby nisiprius » Wed May 22, 2013 9:36 pm

SpaceSashimi wrote:Can someone explain the Vanguard Prime Money Market Fund in depth to me. Is it just a temporary account to hold your money until you know what to do with it?
Pretty much, yes. It's also usually the "settlement account" for everything that happens in your account. When you sell a mutual fund, the proceeds of the sale typically end up in that account.
Does it make interest if left there awhile?
For over thirty years, from 1975 to 2008, it always did, often quite a lot. It was earning around 5% in 2007. Like most money market accounts, it always used to earn more than bank accounts.

But in the last few years the interest rate on all safe cashlike investments has dropped to almost nothing. And although money market funds always used to earn more than bank accounts, that's not true any more. It is currently is earning 0.01% which is basically zero.
Why does it have an expense ratio?
Because it's a mutual fund and mutual funds are required to give that information. However, all stated performance numbers are after expenses, so the 0.01% you see is what you get. You aren't losing 0.15% per year in the fund.
Should I keep anything in it?
They used to be great places to keep cash. Not any more.

You probably need to have one as a settlement account. A staging area for buying and selling. If you link your bank account, you can purchase mutual funds directly out of your bank account but there's a delay. Money that has been moved into the money market fund, and that is showing as available for purchase, can be used to purchase a mutual fund immediately.

You should avoid keeping large amounts of money in this account for very long, because it earns less than an ordinary bank savings account. Don't feel there's any big rush to get dollars out of it and into the bank instantly; just do the math. For example, if you kept $10,000 sitting in this account, it would be earning $1 a year, while in a good Internet bank account it could be earning $75 a year. And theoretically it's less safe than a bank account, because it isn't FDIC-insured.
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Re: Vanguard Prime Money Market Fund

Postby SpaceSashimi » Wed May 22, 2013 9:37 pm

So I can leave x amount in there to avoid the wait when transferring without being concerned i'll lose anything correct? I guess for every brokerage they use a money market to give your money a place to stay until you know what investments you want?
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Re: Vanguard Prime Money Market Fund

Postby Laura » Wed May 22, 2013 9:44 pm

Yes, most places use a money market account as a holding account. I would feel comfortable using the Prime Money Market account that way.

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Re: Vanguard Prime Money Market Fund

Postby Laura » Wed May 22, 2013 9:49 pm

You might enjoy reading this Making Sense of Money Market Funds.

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Re: Vanguard Prime Money Market Fund

Postby tfb » Thu May 23, 2013 2:43 am

nisiprius wrote:If you link your bank account, you can purchase mutual funds directly out of your bank account but there's a delay. Money that has been moved into the money market fund, and that is showing as available for purchase, can be used to purchase a mutual fund immediately.

Not any more at Vanguard (the mutual fund side). Buy orders out of a bank account execute at the same speed as exchanges out of a money market fund. For this reason it's no longer necessary to use a money market fund for regular taxable accounts or for making a contribution to or taking a withdrawal from an IRA.
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